The Best Midsize Bank for Your Portfolio

With earnings season winding to a close, I have started to search for the next investment to add to my portfolio. Since I spent most of April looking at bank earnings, I figured banks would be as good as any place to start looking. Not all financial companies are created equally, however, so I have decided to break my search into four distinct groups: "too big to fail" banks, banks with more than $1 billion in market cap, banks with less than $1 billion in market cap, and other financial service companies. From each group, I plan on selecting one company to potentially add to my portfolio. In the meantime, I will make CAPScalls with hopes that they can help my CAPS score.

Still big, just not as bigIn this article, I will be examining institutions chosen from a group of 62 banks that currently have a market cap over $1 billion. The five banks below are household names and were chosen because they are some of the best performers over the past few quarters. Though not nearly the same size as the "too big to fail" banks, they are still an important piece of the financial industry.

On with the eliminations!The first bank to get cut is Bank of Hawaii, the smallest bank on the list. While its presence on the islands-state of Hawaii provides the bank a great moat from competitors, its remote location could also hinder further growth. Customer growth is fairly limited to people living in Hawaii and other Pacific islands. Furthermore, the economy of Hawaii has had some impact on the performance of the bank during the last quarter, with a longer residential foreclosure process leading to an increase in nonperforming assets during the previous quarter.

The second bank to not make the grade is US Bancorp, the largest on the list. There are plenty of things to like about the bank. It is the eighth-largest holding in the portfolio of Berkshire Hathaway. It recently passed the Federal Reserve stress tests, leading to a 50% increase in its dividend. But while I think the bank will continue to perform well, others on the list are not hindered by size as much as US Bancorp. It sells at a premium to book value and its yield, though it will soon grow, is the smallest on the list. One of the three remaining banks looks to be a better choice at this juncture.

And then there were three...The remaining three banks all have their merits. Huntington Bancshares is the cheapest based on P/E ratio and sports a dividend with plenty of room to grow. New York Community has a yield that approaches 8%, more than twice the size of the second-highest yields on the list. First Niagara, while the most expensive based on P/E, is the only bank trading at a discount to book value and still sports a healthy yield.

Unfortunately for First Niagara, its P/E is a little too high for my taste, especially compared to the others on the list. Otherwise, it would make a great addition to my portfolio. Even though it recently cut its dividend in half, it is reinvesting the money saved in growing its geographic footprint, purchasing 196 branches from HSBC, some which it plans to later sell to other banks. Things look promising for this well-capitalized bank, and may make it an attractive candidate in the near future.

There can be only oneIf you compare the remaining two banks on the three primary criteria, it's a wash: Huntington has the lower P/E, New York Community the higher yield, and both trade for the same P/B ratio. Huntington is still a nice choice, and the bank is cheap based on other factors, but my choice is New York Community. Its dividend yield, which is more than three times that of Huntington, swings the vote. With a recent quarter that saw the bank improve assets quality for the sixth consecutive quarter, the New York bank beats out its similarly sized cousin from Ohio.

Accountability timeThough I am not planning on purchasing shares of New York Community at this time, I will be keeping an eye on the company and tracking its performance at Motley Fool CAPS. I will be giving the bank a "green thumb" rating, indicating I think it will beat the market for the foreseeable future. I encourage you to do the same.

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